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BOK Financial Corp  (NASDAQ:BOKF)
Q1 2019 Earnings Call
April 24, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the BOK Financial Corporation First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, today's conference is being recorded.

It is now my pleasure to introduce your host Steven Nell, Chief Financial Officer. Thank you. You may begin.

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Good morning. Thanks for joining us. Today, you'll hear from Steve Bradshaw, our CEO; Stacy Kymes, Executive Vice President of Corporate Banking; and Marc Maun, Executive Vice President and Chief Credit Officer, and I'll also provide some remarks about the quarter. PDFs of the slide presentation and first quarter press release are available on our website at www.bokf.com. We refer you to the disclaimers on Slide 2, as it pertains to any forward-looking statements we make during the call.

I'll now turn the call over to Steve Bradshaw.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning. Thanks for joining us to discuss the first quarter 2019 financial results. As shown on Slide 4, the first quarter was a great start to 2019 for BOK Financial. For the quarter, net income was $110.6 million or $1.54 per diluted share, up 2% from the previous quarter and up 4.8% from the same quarter a year ago. The quarter-over-quarter growth was driven by a number of key factors.

We continue to see loan growth as we build-off of an outstanding year in 2018. We remain optimistic about achieving our loan growth targets, as long as the broader economy continues to remain strong. We did experience lower net interest income and net interest margin this quarter, largely due to a change in deposit mix and increased levels in our trading activities. We will cover this in more detail momentarily.

Fee and commission revenue picked up this quarter in our brokerage and trading, and mortgage banking segments, as they both reacted positively to forward rate guidance by the Federal Reserve. While on the surface overall fees were relatively flat quarter-to-quarter, the increased activity in these business lines was welcomed and should help bolster our fee revenues this year.

Expense management remains a focus and continues to drive earnings leverage within the organization. We successfully completed the CoBiz systems integration last month. So this quarter will be the last with incremental expense related to the CoBiz acquisition. CoBiz integration expenses totaled $12.7 million in the quarter and $26.6 million of total operating expenses are CoBiz related. Steven will speak in more detail about what to expect on expenses going forward. The credit environment continues to be stable. Consistent with our results in 2018, our continued loan growth was really the primary driver of our $8 million loan loss provision this quarter.

Turning to Slide 5, period-end loans were $21.8 billion, an increase of $102 million for the quarter, led significantly by our energy and healthcare channels. We continue to grow loans even with the wave of the anticipated pay downs we experienced in our commercial real estate portfolio this quarter. Stacy will provide more details on the CRE portfolio a bit later.

Assets under management or administration were $78.9 billion, that was up $2.6 billion from last quarter, as the recovering equity market supplemented our strong asset gathering activities during the quarter. All told, we feel very positive about the quarter and our trajectory for 2019. In fact, in this quarter, we bought back over 705,000 BOKF shares at an average price of $85.85 per share in the open market, staying consistent with our opportunistic capital deployment strategy.

I'll provide some additional perspective on the results at the conclusion of these remarks, but now I'll turn the call back over to Steven Nell to cover the financial results in more detail. Steven?

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Thanks, Steve. As noted on Slide 7, net interest revenue for the quarter was $278.1 million, a decrease of $7.6 million from the previous quarter. Net interest margin was 3.30%, down 10 basis points from the previous quarter. These decreases were driven primarily by the combination of lower average non-interest bearing demand deposits and higher average trading activity versus the prior quarter. Each factor represented approximately 5 basis points of net interest margin decrease. While some of the decrease in non-interest bearing demand deposits were seasonal, some appears to be commercial customers putting their cash to use. This decline in non-interest bearing balances resulted in slightly lower net interest revenue margin.

Based on activity late in the quarter, we see some recovery of these balances, so hopefully we'll see a better impact to net interest revenue margin in the second quarter. Much of the revenue associated with the higher trading activity is recorded in brokerage and trading fees rather than interest income while all of the related funding costs remain in interest expense leading to slightly lower net interest revenue and margin. The yield on average earning assets was 4.46%, a 13 basis points increase and the yield on the loan portfolio was 5.26%, up 17 basis points due to that carryover from the December 2018 rate hike. The yield on the available for sale securities portfolio increased 6 basis points to 2.57%, while the yield on the trading securities portfolio was down 22 basis points. The overall cost of interest bearing liabilities increased 24 basis points to 1.66%, including a 17 basis point increase in interest bearing deposits to 1.04%.

On Slide 8, fees and commissions were $160.6 million, relatively flat on a sequential basis, though there were some bright spots that we think bode well for fee revenues in 2019. Lower mortgage interest rates led to an increase in mortgage applications and commitments, which helped drive higher revenue this quarter. Mortgage revenues were up nearly 9% and gain on sale margins increased 18 basis points over the previous quarter.

As we have mentioned in previous calls, our focus during the overall mortgage market slowdown has been to increase efficiency in the space. We have worked the past few quarters to rightsize expenses and with rate hikes subsiding, these efforts have been rewarded with better operating leverage. Additional cost saves on mortgage were undertaken this quarter as part of a strategy shift away from the online lead buying business branded HomeDirect. With margin erosion in the industry, we've made the decision to forgo the transactional price sensitive nature of lead buying to refocus on our core competency of developing complete long-term relationships within our retail mortgage channel.

Brokerage and trading revenue increased 12.5% for the quarter, primarily driven by the combination of increased investor demand as market confidence improved as the Fed signaled interest rate stability, as well as our decision in the fourth quarter to expand the limits for our broker dealer trading desk. Resulting mortgage backed security trade volumes increased approximately 18% linked quarter and the trade mix shifted from TBA derivatives to more specified tool securities, which was a factor in the growth in average and period-end unsettled securities sales receivable that lowered our net interest margin.

Fiduciary and asset management revenue was down slightly even with an increase in assets under management. With the market drop off in December, existing balances contracted shrinking the fee base. But with increased business and the market recovery this quarter, we expect fee levels in this segment to rebound. Deposit service charges were down nearly 4% this quarter as a result of two fewer days in the quarter compared to the fourth quarter. Other revenue decreased $3.6 million, primarily due to a decrease in revenue earned on certain repossessed assets compared to the fourth quarter of 2018.

I'll also mention that our total economic cost of changes in the fair value of mortgage servicing rights, net of economic hedges was $5.4 million. This was due primarily to the combination of significant mortgage rate volatility, primarily in March and other unhedgeable factors.

Turning to Slide 9, operating expenses were up $4 million excluding CoBiz related integration costs, which I'll talk more about later. The following comments addressing expense fluctuations omit CoBiz one-time integration costs. Personnel expense increased $10.9 million over the prior quarter, so it's largely a result of the equity award reversals in the fourth quarter that we mentioned in January. We've now resumed a more normal level of equity compensation expense recognition in the first quarter of 2019. The remainder is attributable to a $1.9 million increase in employee benefits due to a seasonal increase in payroll taxes, partially offset by a decrease in healthcare costs.

Non-personnel expense decreased $6.6 million over the fourth quarter in 2018. Last quarter included a $2.8 million charitable donation to the BOK Foundation that impacts the comparison. In addition, business promotion expense decreased $1.7 million and mortgage banking costs decreased $1.6 million, both due to seasonality. Professional fees and services decreased $1 million. These decreases were partially offset by an increase in data processing and communications expense of $3 million.

Slide 10 has our current outlook for 2019. We expect mid-single digit loan growth for the consolidated BOK Financial and CoBiz entity with continued strength in energy, healthcare, and general CNI business. Loan loss provision levels will be influenced by this loan growth, but will likely run at similar dollar levels when compared to the past few quarters. We have revised our 2019 forecast to include zero interest rate hikes in 2019. With the changing interest rate outlook, we now see little opportunity to improve net interest margin. Deposit mix as well as the pricing required to gather deposits to fund future loan growth will determine the level of margin pressure going forward. We expect the revenue from fee generating businesses will be slightly up from current levels as we continue to grow the legacy BOKF portfolio, as well as we begin to sell into the CoBiz customer base.

CoBiz integration costs totaled $30 million, $17 million in 2018 and $13 million in the first quarter of 2019. This is significantly lower than the $42 million estimate we mentioned last quarter. We came in under budget in several ways. First, we required less outside temporary help or professional engagement during the conversion than we anticipated, saving $3 million. Second, we saved nearly $2 million in contract buyouts and saved an additional $2 million in personnel costs as some individuals chose to leave before integration was completed or are now part of our ongoing staff. And finally, our budgeted contingency expense of almost $3 million was not needed.

We estimated, in the second quarter, we'll achieve personnel cost synergies of approximately $4 million per quarter. Additionally, later in the year, we should begin to realize synergies from consolidating four downtown Denver facilities into one. Except for some additional business promotion spend as a result of our new branding in the Colorado and Arizona markets, we expect the majority of the cost saves initially anticipated should be realized. As a result of these saves, we expect that our efficiency ratio will reach the 60% target in the second half of 2019. All told, we had previously guided to 6% EPS accretion from the CoBiz transaction in 2019. And now with a successful integration behind us, it looks like we'll be closer to 7% in EPS accretion this year.

Stacy Kymes will now review the loan portfolio in more detail. I'll turn the call over to Stacy.

Stacy C. Kymes -- Executive Vice President, Corporate Banking

Thanks, Steven. As you can see on Slide 12, total loans were $21.8 billion, up $102.3 million for the quarter. Normalizing for the CoBiz portfolio for the annual comparison, total loans were up nearly 9% year-over-year. Total C&I was up 2.4% for the quarter. Our portfolio diversification and specialty lines of business like energy and healthcare is a key differentiator for us and were responsible for the bulk of C&I growth this quarter. Energy was up 3.2% for the quarter. Our prominence in this space aided by our 100-year track record continues to pay dividends for us compared to our competitors. We continue to benefit from lower than normal churn in the energy portfolio as well, as companies are slower to divest assets or sell outright in the current market environment.

Our healthcare channel was up 4.2% sequentially for the quarter. This channel remains a growth engine for BOK Financial and is expected to continue to be a leader for us. Many large national players and senior housing struggled in 2018, adding some tailwinds in 2019 for regional players, which constitutes our primary customers and prospects. Paydowns in the commercial real estate portfolio left the segment down 3.4% for the quarter, but year-over-year growth is still up over 4%. I'll add that our commitment volume is still very strong in this space, so I expect this quarterly decline to be a temporary setback. More broadly, we remain optimistic about core loan growth as we begin 2019 as long as the larger economy continues to show strength. That said, we will continue to manage our portfolio concentrations in a prudent manner to ensure that we do not become overexposed in any one area. Marc Maun will now review asset quality in more detail.

Marc C. Maun -- Executive Vice President and Chief Credit Officer

Thanks, Stacy. On Slide 14, you can see that credit quality remained strong as it did throughout 2018. Our credit metrics in particular associated with our healthcare and energy portfolios are favorable when compared to peers. With regards to leverage lending, there are lot of definitions. We are not active in the equity-sponsored, collateral-light enterprise value market, which we consider the most risky and have very limited exposure. We continue to follow our playbook, loan growth without underwriting compromise and this strategy continues to pay dividends for us as others in the industry have started to see credit challenges.

Non-accruals were down $11 million during the quarter, largely in the energy portfolio. Net charge-offs moved to 19 basis points down from 23 basis points last quarter. Net charge-offs for the first quarter were primarily related to a single energy production borrower and a single healthcare borrower, both of which have been previously identified as impaired and appropriately reserved. Potential problem loans, which are defined as performing loans that, based on known information, cause management concern as to the borrowers' ability to continue to perform, totaled $169 million at March 31, compared to $215 million at December 31.

Based on the evaluation of all credit factors, including overall portfolio growth, changes in non-accruing and potential problem loans and net charge-offs, the Company determined that an $8 million provision for credit losses was appropriate for the first quarter of 2019. We remain appropriately reserved with a combined allowance of 0.95% of period-end loans and leases.

And lastly, a word on CECL. Our credit and finance teams continued to develop our models with our first parallel run this quarter. We will continue to fine tune the models and the process during the next two quarters to determine what our expectations are for implementation. I would note that our portfolio is relatively short term due to our commercial orientation, largely precluding us from large impact overhauls to our existing process.

I'll now turn the call back over to Steve Bradshaw for closing commentary.

Steven G. Bradshaw -- President and Chief Executive Officer

Thanks, Marc. Again, it was a solid start to the year for BOK Financial. I'm optimistic about the outlook for continued loan and fee growth this year and I'm very pleased with what we've been able to achieve on the expense side. We will continue to focus on deposit gathering across all lines of business and as Steven noted, we see some improvement already in that regard here in the second quarter.

We also came in below our guidance on expenses related to the CoBiz integration and now our full focus is on customer experience and growth strategies within our Colorado and Arizona markets. We expect run rate efficiencies to be fully realized through the rest of the year. And although, we did not assume revenue synergies in our acquisition analysis, we expect to gain from our added scale and the capabilities we bring as we welcome former customers of CoBiz to BOK Financial. We continue to carefully monitor credit quality and we remain comfortable that our portfolio is well-positioned in the current environment.

I believe the credit metrics that Marc discovered and our credit results, in particular, associated with our healthcare and energy portfolios are very strong when compared to peers, which is a result of our intentional focus on our time-tested conservative underwriting culture, one that has served the Company and its shareholders well across a number of credit cycles in the past 27 years.

With that, we will take your questions. Operator?

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Ken Zerbe of Morgan Stanley. Please go ahead with your question.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Hello, Ken.

Kenneth Zerbe -- Morgan Stanley -- Analyst

I guess, starting off in terms of the margin, obviously it did come down quite a bit this quarter, so 3.30%. If you -- I think, it was Steven, you mentioned that you're expecting some of the non-interest bearing deposits to come back. Can you just give us or help us quantify, if you do get whatever you expect in terms of non-interest bearing coming back, how much does that actually benefit your NIM in second quarter, because when I'm comparing it to your guidance where you say, on Slide 10, where basically there's a little opportunity to improve NIM?

Steven G. Bradshaw -- President and Chief Executive Officer

Okay. Well, the NIM was impacted this quarter about 5 basis points from $660 million of DDA on average runoff. So, so far kind of through the end of the quarter, and then on into the second quarter, we've seen some improvement. So I think if you just extrapolate the kind of detriment that it had on this quarter's NIM to some recovery of those balances going forward, you can kind of come up with the amount of NIM impact it would have in the second quarter.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. So if they all came back, then you'd get roughly the 5 basis points of benefit?

Steven G. Bradshaw -- President and Chief Executive Officer

That's correct.

Stacy C. Kymes -- Executive Vice President, Corporate Banking

Ken, this is Stacy. There's a lot of moving parts embedded in that. I think there's aspects of our liability structure that are more volatile. So, for example, on the energy side, we saw declines in our energy balances during the first quarter and we would expect some of that to come back. So, for example, when we look at the reason those demand balances declined in energy specifically, those guys are getting that checks from their oil and gas revenue roughly 90 days in arrears of when the price occurs and so if you think back 90 days previous to that, you had a lower price. And so they're using more free cash flow in their operation of their business. As we began to look forward and to Steven's point about having a reasonable expectation that some of the demand deposits may come back, we see with the recent run up in particularly the oil prices, we would have an expectation that, if we look forward 90 days, that we'll see some recovery there as they get higher revenue from oil and gas production. Just as one example of the many moving parts inside of our balance sheet.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got it. Okay. No, that does help. And then I guess sort of on the same topic. In the press release, you do talk about the trading activity, so I'm trying to make sure I get all the pieces here. So brokers and trading was higher from a fee perspective. So you mentioned that the asset or the liabilities are included in interest expense and it sounded like that was another reason for the NIM and NII being lower, but can you just help us -- like, can you just explain that process to us a little bit? Thanks.

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Yeah. So if you look at our balance sheet, you'll see the receivable on our unsettled securities sales line items go up on average $425 million, so we are effectively carrying that non-earning asset waiting for that to settle. But we're picking up the revenue associated with that trading activity that trade down in the brokerage and trading line item. So we're effectively providing liquidity for our client a little bit longer and carrying that through interest expense, but earning that back, our portion of that back through the actual brokerage and trading revenue. So it has a negative impact on NIM, but when you put the pieces together, we're still profitable with that trade.

Kenneth Zerbe -- Morgan Stanley -- Analyst

And so if we saw brokerage and trading continuing to be strong or increasing from here on out, does that create a permanent downward pressure on your margin or was that more temporary in nature?

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Well, it could. I mean, it just depends on the nature of those trades and how long the client wants to wait to settle that trade out and for us to deliver that transaction. So, I mean, it could.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay.

Steven G. Bradshaw -- President and Chief Executive Officer

This is Steve Bradshaw. We actually made the -- we made the decision going into 2019 that we would expand our trading efforts. We've also been opportunistic in terms of bringing some additional resources on. It's kind of the classic page out of our playbook that when we see a business that's a little bit out of favor, we have the opportunity to pick up some talent and commit to it. So we expected to increase our trading limits during the first quarter and we did. Steven is right, it could be -- it kind of depends on what that volume is every quarter. Although, we're reaching some of those limits that we're comfortable with today, so on a steady state basis, it wouldn't have a continuous negative impact on the NIM going forward.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay, perfect. Thank you very much.

Operator

Thank you. Our next question is coming from Brady Gailey of KBW. Please go ahead.

Brady Gailey -- Keefe, Bruyette, & Woods -- Analyst

Hey, good morning, guys.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Brady Gailey -- Keefe, Bruyette, & Woods -- Analyst

When I look at the guidance, the 60% efficiency ratio by the back half of this year, as you look to 2020, do you think there is opportunity for that efficiency ratio to go lower like into the high 50% range or do you think that 60% is just a good longer term run rate for you guys?

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Well, I actually think we will pass through 60% sometime in the second half of the year. So I don't expect us to stop at 60%, to answer your question. I really think we reach that mark and pass through it. And then we'll see what kind of budgets and activity we can put together for 2020, but I would expect us with the level of fee revenue that we have now to operate somewhere in that high 50% marks. We're never going to be a bank that gets to straight up 50% and we have way more fee revenues that drives that efficiency ratio up, but we have operated this Company in the past in the high 50% and so that's kind of where we're hopefully headed.

Brady Gailey -- Keefe, Bruyette, & Woods -- Analyst

Okay. And then on the buyback, you repurchased roughly 1% of the Company this quarter, close to what you did last quarter, in the fourth quarter. So your TCE is now 8.6%, but I mean, the stock is cheaper than where you've repurchased it last couple of quarters. Can you just talk about how you think about buybacks as it relates to TCE and if you think buybacks are likely going forward?

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Yeah, I do, I think buybacks are likely going forward. I mean, I think at this level of the stock price with the outlook for the success of the Company going forward, you'll see us utilize some of our excess capital in this fashion. Maybe that's a little different in the past, but we feel there's pretty good opportunity to be in the market and we have been in the last couple of quarters, as you noted. 8.6% TCEs, I mean that's a healthy TCE. I have no problem moving that down. There's not a target level that I would say we would go to necessarily. I know that rating agencies look at that pretty closely. We could evaluate that, but we have room to buyback.

Brady Gailey -- Keefe, Bruyette, & Woods -- Analyst

All right. Thanks, guys.

Operator

Thank you. Our next question is coming from Peter Winter of Wedbush. Please go ahead.

Peter Winter -- Wedbush Securities -- Analyst

Good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning, Peter.

Peter Winter -- Wedbush Securities -- Analyst

There was a big increase this quarter on the interest bearing deposit costs. And I'm just wondering what the outlook is for interest bearing deposit costs for kind of the remainder of the year?

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah. If you look at the first quarter, we did have more exception pricing in our particular commercial book and some in well compared to the fourth quarter. So if you -- you saw that 17 basis point increase in interest bearing deposit, that's up in the 60% or so kind of beta area. With now the outlook of rates flat, you probably don't see that kind of an increase going forward. You may see a little bit of additional exception pricing, but I wouldn't expect it to elevate to that level. Part of it depends on how much of the loan growth we get in the second -- in the last three quarters of the year, how much of that do we want to fund with deposit growth, what happens on the DDA side, I mean, there's lot of moving parts, as Stacy mentioned earlier. But I wouldn't expect the betas to be -- there's just not going to be a rate move, we don't think now. But I wouldn't expect it to be as much pressure on the deposit pricing as we saw in the first quarter, would be my estimation.

Peter Winter -- Wedbush Securities -- Analyst

Okay. And then just on the -- if I look at securities to assets, it's always high. I know you use it to help manage the asset sensitivity of the balance sheet, but I'm just wondering, any thought on letting securities maybe run off to fund loan growth and take some pressure off deposit costs?

Steven E. Nell -- Executive Vice President and Chief Financial Officer

We would look at that an outgo, but I'd probably not. I mean, I think we like the level of securities that we have. It's all in the context of where we want to position the net interest -- the rate risk of the Company. It is the primary item we use on the balance sheet to monitor and maintain that, around that kind of neutral spot. I don't know that we have philosophically a change in that approach at this point.

Stacy C. Kymes -- Executive Vice President, Corporate Banking

And, Peter, you recall, a lot of that -- this is Stacy -- a lot of that, it's a very high quality securities portfolio, so most of that is really self-funded. It's not necessarily funded through deposits.

Peter Winter -- Wedbush Securities -- Analyst

Okay. And then just my last question, just on operating expenses. Given the integration and the cost saves with CoBiz, would this quarter be the high watermark for expenses and we would expect to kind of trend lower for the remainder of the year?

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah, I think so. I mean, I think if you take out the integration costs that you saw, it's $12.7 million and then if you continue to pick up in your numbers the synergies that we expect, or we've really already gotten, both on the personnel side and non-personnel side, you should see a lower expense base in the second quarter and going further. We're going to spend a little bit more money I think in the second and third quarter on kind of business promotion where we're doing some branding initiatives with our new BOK Financial brand out west. You'll see a little bit of that. And then we'll continue to gain some synergy in our occupancy space as we continue to consolidate buildings and sublease some buildings and get everyone moved over to one spot in Denver. So I think this is our high watermark.

Peter Winter -- Wedbush Securities -- Analyst

Great. Thanks very much.

Operator

(Operator Instructions) Our next question is coming from Gary Tenner of D.A. Davidson . Please go ahead.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning. I wanted to ask about the mortgage strategy just in terms of continuing the lead buying business. Can you talk, Steve, just about what the -- what amount of volume came through that channel, say, in the first quarter and then just maybe quantify the difference between the margins in that versus your retail origination?

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah, this is Steve Bradshaw, I can speak to that. I think the high watermark in terms of the percentage of production coming from HomeDirect was somewhere in the 30%, 35% of total production. And that was at a point where the margins were strong enough to really justify that effort and because it was in a heavy refi market where the direct channel really kind of flourishes. As we've moved to really strong purchase market really north of 70%, the lead costs have grown pretty substantially, while the margins have come down. It's not a model that we think is particularly sustainable for us in an elongated purchase market which is where we think we are today.

So from our perspective, we are reducing our reliance on external leads and the costs there and we're refocusing that group on internal lead generation inside the organization. So opportunities to create a really great experience for mortgage lead to come through the branch network, come through our wealth management group, other types of channels. So the expertise that's there, we see as a real advantage, but we're going to focus them internally and that obviously gives us the best opportunity to expand the relationship beyond just a mortgage loan.

So it's a little change in philosophy there for us and it is absolutely an expense play. We actually saw margins expand in the first quarter, I think, 18 basis points and a lot of that is -- reflects the fact that we're getting out of that external lead buying and we are ramping up our purchase business out of retail network. So those combined I think gives us a better operating model for mortgage in today's world going forward. And we've been also achieving some cost efficiencies in other areas in that organization. We will continue to make sure that we've got the right expense base to support it. So back to the earlier question to Steven about efficiency, I think that would be a contributing factor to us moving down below 60% efficiency is just gaining a little more operating leverage inside mortgage going forward.

Gary Tenner -- D.A. Davidson -- Analyst

Okay. Thank you. Just again to clarify, so you were at a high watermark you said of 30% to 35% of total production from that channel. What was it in the first quarter?

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah, I don't recall at the top of my head.

Steven E. Nell -- Executive Vice President and Chief Financial Officer

It was less than that, but I don't -- I don't know exactly.

Steven G. Bradshaw -- President and Chief Executive Officer

I want to say it's less than 20%, but we'll get that information for you.

Gary Tenner -- D.A. Davidson -- Analyst

Okay. I'm just curious what the impact might be on a sequential basis. So will you be completely exited from that business for the second quarter? There will be a (multiple speakers) or is there a wind down ?

Steven G. Bradshaw -- President and Chief Executive Officer

No, we won't leave. We'll be continuing to wind down kind of the external element, the lead buying and kind of a national scope there that will continue to wind that down over the course of the year. But we are substituting the lead generation from all of those internal sources. We've been doing some things to increase awareness in referral business inside of our kind of core network. So in terms of the team that remains in HomeDirect, they've got an awful lot of activity going on and we focused on higher margin business for us within our footprint.

Gary Tenner -- D.A. Davidson -- Analyst

Okay, great. Thank you for the color.

Steven G. Bradshaw -- President and Chief Executive Officer

Sure.

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is coming from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey. Thanks. Good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey. Just I had some other questions, but just a quick follow-up on Gary's question. Do you expect a step-down in mortgage revenue in Q2 or your pipeline is such that you might see a typical lift, a Q2, Q3 lift?

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Yeah, this is Steve. I don't believe that. We're actually kind of in the peak season and our application volume has been strengthening kind of throughout the year and with the higher margin we get from retail, I don't think we would expect to see a significant step back just because we're reducing our reliance on external leads. It will show up in top line, mortgage production, but not in the top line revenue number, in my opinion.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. That's helps. Stacy, on energy lending, do you have any different when prices are rising? I mean, we've been through all the ups and downs with your Company. And I'm just curious if you've changed your approach at all as particularly crude prices rise?

Stacy C. Kymes -- Executive Vice President, Corporate Banking

No. We don't. That's kind of the beauty of -- good times and bad times, we're looking at it the same way. If you think about, though, how we value that, we're still working off kind of the end of March forward price deck as we've had a nice run up here in April. But we're underwriting 2019 at $59 oil, 2020 at $58 oil, 2021 at $56 oil, obviously the curve is backwardated. So when you look at that effect, the near-term spot price or prompt month price has run up more significantly than the overall strip has. But we don't change that in terms of how we look at it. We may be more aggressive with hedging and asking our customers to hedge and understanding their risk management strategies, prices begin to move up like this because we see that as an opportunistic way to lock in good margin for our customers, but in terms of underwriting, our standards don't change.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Good. And then I don't know if this is for Steve or Steven, but in your guidance, you talk about on the revenue from fee generating businesses and you have a (inaudible) as we begin to sell on the CoBiz customer base. Can you talk a little bit about what you expect the magnitude of that to be and how it has gone so far with generating fees out of the new customer base?

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah, this is Steve Bradshaw. I don't know that I would offer out what we think the magnitude will be, but we're encouraged even throughout the entire integration process, which is by its nature kind of inward focused. You're focused on training and onboarding new employees, you're focused on making sure that customers understand what will change after the data integration and we're still working through some of that as you would expect. But we've been encouraged because of the desire that we've seen from our relationship managers that join us from CoBiz to go out especially with things like our wealth management business, which is obviously a big strength of the Company. We're seeing some traction in our treasury group where we have some capabilities that were stronger in some business segments than what CoBiz had et cetera. So that sales effort and that kind of going on offense, if you will, is already under way. So I'm optimistic about it. I don't know that I would ascribe a dollar amount to it, but it will certainly be something that we'll see grow I think throughout the remainder of the year.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Thank you for that. And then just the last one in terms of increasing the limits on the training desk. Not being critical of that, but I'm just curious, by increasing your limits, what are the risks that you're accepting by doing that? How should we think about maybe the pros and cons of the decision to increase limits?

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I think it's a concern. I think we're just allocating, if you will, a little bit more of the balance sheet toward that business to take advantage of it, as Steve mentioned. So of course, we've got a risk management team that monitors all of that activity daily. We had daily limits. We see all of that in our asset liability committee meetings. We're not biting off and improving the amount of additional risk by allocating a little bit more of the balance sheet toward that business. I think it's the right thing to do.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right, thanks for help.

Operator

Thank you. At this time, I'd like to turn the floor back over to management for closing comments.

Steven G. Bradshaw -- President and Chief Executive Officer

Well, we appreciate everyone's questions. Thanks again for joining us this morning. And if you have any additional questions, feel free to call me at 918-595-3030 or you can email us at ir@bokf.com. Everyone, have a great day.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.

Duration: 40 minutes

Call participants:

Steven E. Nell -- Executive Vice President and Chief Financial Officer

Steven G. Bradshaw -- President and Chief Executive Officer

Stacy C. Kymes -- Executive Vice President, Corporate Banking

Marc C. Maun -- Executive Vice President and Chief Credit Officer

Kenneth Zerbe -- Morgan Stanley -- Analyst

Brady Gailey -- Keefe, Bruyette, & Woods -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

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